Arm Holdings (NASDAQ: ARM) is a fantastic business. The company develops the Arm architecture, which clients license in various ways to develop their own chips. Some clients license Arm's CPU cores, while others license the architecture itself to develop highly customized processors. , for example, licenses the Arm architecture for the custom chips that power its iPhones, iPads, Macs, and other devices.

Arm collects licensing fees as well as royalty fees based on the number of devices shipped with Arm technology and the complexity of the chips. While licensing revenue grew faster than royalty revenue in the third quarter of fiscal 2024, which ended on Dec. 31, Arm expects royalty revenue to be the main driver of growth going forward as demand for Arm-based chips expands.

Shares of Arm rocketed higher after the company's third-quarter report last week, with the stock more than doubling at one point. Some of those gains have since eroded, but Arm stock is still up about 75% as I write this. While Arm's results were solid, a guidance bump and optimistic talk about how artificial intelligence would drive demand for Arm chips were likely behind the epic rally.

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Source Fool.com